Legality

Please check your local legislation for second suites legal requirements.

In Ontario, Canada, The Strong Communities through Affordable Housing Act, 2011, amended the Planning Act to require that all municipalities authorize second units in their official plans and zoning by-laws.

Each municipality has its own rules & restrictions that you should comply with in your investment. There are areas where second suites are not allowed. There are some specific characteristics of a property that make it a good fit for an economical addition of a legal second suite. Verify what these parameters are in your area before you purchase a house.

How The Strategy Works

Confirm second suite and property requirements in your area

Purchase a property that has no legal second suite, but is appropriate for adding one in

Apply for and obtain a permit for adding a second suite

Engage & manage contractors who will do the work

Rent out main suite

Complete adding a legal second suite

Rent out second suite

Re-finance the property

Repeat.

Benefits of Secondary Suites Investment Strategy

There are numerous ways to invest in real estate. Secondary Suites is one of them. It became very popular around here in GTA, ON Canada. Here are the main reasons:

Demand - Secondary suites strategy is widely supported by the government in many municipalities because it helps to increase supply of rental units where demand exceeds available inventory. Ontario, Canada, for example, made it required that all municipalities allow legal second suites to boost their creation.

Cash Flow - Rental income from the second unit increases cash flow considerably. For example, in Barrie, ON, a 3-bedroom house can be rented for about $2,100 / month. If you rent the second unit, for an additional $900, your gross rental revenue will increase from $25,200 to $36,000 per year (42% increase) and result in better cash flow.

Value of Property - Investment property is a business. The value of this business strictly ties to the income that it produces. Second suite increases the income of the property and, therefore, increases its value.

Flexible Investment Product - Secondary suites work well for many types of renters (young couples, single people, retirees, students, travelers, etc.). They also allow flexibility on investor side. In many cases, entrepreneurial home owners use a second suite to off-set their own mortgage payment.

Higher tenant quality - Many tenants are interested in living in high density residential areas within great communities with good schools, established infrastructure, and safe neighbourhoods. This allows for highly selective tenant search and qualification process, resulting in higher quality of tenants.

What are the Cons?

Here are some of the cons you should be aware of.

Size of Initial Investment - In order to pursue this strategy, you will typically need 20% down payment plus 50-70K budget for adding a second suite.

Project Management - Coordinating the project to add a legal second suite may be a lot of work, especially when you do it for the first time.

How to do it right?

The presenter at the MeetUp specializes in second suite design, communications with municipalities, obtaining, engaging with reliable sub-contractors throughout GTA, and overseeing the project start to finish. His company already completed over 50 units.

Here are some of tips on how to do it right:

Ensure accurate documentation

Obtain all required permits

Before you purchase, confirm critical legal second suite requirements in your area. For example,

Parking

Ceiling height

Square footage

Windows/exists

As you design and build the unit, plan for most optimal layout, some important aspects are:

Acoustics - it often helps to mirror top unit

Heating & cooling

Plumbing

Dry living space.

Like with any investment, do thorough due diligence and validate all numbers.

Step 1 - Increase Property Value

Suppose you purchase a property for 500K.

Now, let's assume:

Initially: rental income = $25,200 and Expenses = $8,500

With second suite: rental income = $36,000 and Expenses = $14,875

Market remains unchanged with Cap Rate = 3.3%

Then, the value of the property with the second unit, is $21K / 3.3% = 632K.

The property now is worth ~25% more, compared to the original purchase price.

Example: Increase property value from 500K to 632K by adding a second suite

Step 2 - Refinance the Property to Pay Build Costs

Let's assume, total costs so far are as follows:

Closing costs were = 10K

Second suite cost = 50K

Interest on short-term construction loan = 10K

Refinancing cost = 3K

Total = 73K.

If you re-finance the property to 80% of the new value of $632.5K (see Example 1 above), you will receive 33K back (632.5K * 80% - 400K original loan - 73K).

To continue this sample scenario, I assume that we do not pull the remaining cash out. Instead, we use it to decrease our mortgage to 473K (632.5 * 80% - 33K extra cash).

Refinance property and pay off the cost of adding the secondary suite

Step 3 - Put 154K in Your Pocket

Five-Year Cash Flow Projection

Let's assume, during the next 5 years:

Rents increase by 2% every year

Costs increase by 2% every year

You hold a 3% fixed interest mortgage with 30 year amortization

Property is doing fine and you spend about 25K on any cap-ex expenses, vacancy and small fixes

Hi! I'm Anna. I live in Toronto, ON Canada. I started my 50-doors real estate journey in May 2014, when my husband and I decided to go after real estate cash flow.
I finished RichDad and REMentor coaching programs and love being hands-on investor.
I hope that 50-doors blog and my experiences will help you, if you are aiming to build real estate cash flow in Canada as well.
Besides real estate, I enjoy reading biographies of successful people, meditating, practicing karate, watching action movies, and spending time with my family and friends.
If you'd like to connect, please email anna@50doors.com. I'd love to meet you!